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Many companies have embraced the notion that to operate effectively in today’s economy, it is necessary to become a knowledge-based organization.1 But few truly understand what that means or how to carry out the changes required to bring it about.

Perhaps the most common misunderstanding is the view that the more a company’s products or services have knowledge at their core, the more the organization is, by definition, knowledge-based. So, for example, a research institute or consulting firm whose product is entirely knowledge would be at the high end of the knowledge-based continuum, and companies making and selling simple physical products like cement would be at the low end. That is a dangerous assumption, both for industrial-age businesses that may believe they can’t change and for information-age businesses that complacently believe they don’t need to change the way they operate.

In short, the focus on products or services as a means of categorizing companies or defining the knowledge-based organization leads to a distorted image. Products and services are only what are visible or tangible to customers — they’re the tip of the iceberg. But like the iceberg, most of what enables a company to produce anything lies below the surface, hidden within the so-called invisible assets of the organization — its knowledge about what it does, how it does it, and why.2

In the course of working with more than 30 companies over the past eight years, I have found that a knowledge-based organization is made up of four characteristics that can be summarized as process, place, purpose and perspective. Process refers to the activities within an organization, some of which are directly involved with making a product or selling a service and others that are ancillary but no less important. Place refers to the boundaries of the organization, which for the purposes of sharing and creating knowledge often go beyond traditional legal boundaries. Purpose refers to the mission and strategy of the organization — how it intends to serve its customers profitably. Perspective refers to the worldview and culture that influences and constrains the decisions and actions of an organization.

Each of these elements forms a basis for evaluating the degree to which knowledge is an integral part of the organization and the way it competes.